IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 1041:

  A disadvantage of the net present value method of capital expenditure evaluation is that it

  A. Is calculated using sensitively analysis.
  B. Computes the true interest rate.
  C. Does not provide the true rate of return on investment.
  D. Is difficult to apply because it uses a trial-and-error approach.
  C. Does not provide the true rate of return on investment.

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  Explanation

  The NPV is broadly defined as the excess of the present value of the estimated net cash inflows over the net cost of the investment. A discount rate has to be stipulated by the person conducting the analysis. A disadvantage is that it does not provide the true rate of return for an investment, only that the rate of return is higher than a stipulated discount rate (which may be the cost of capital).

• Question 1042:

  Mercken Industries is contemplating four projects, Project P, Project Q, Project P, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%.

  

  During this year, Mercken will choose

  A. Projects P, 0, and P.
  B. Projects P, Q, R, and S.
  C. Projects Q and R.
  D. Projects P and Q.
  C. Projects Q and R.

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  Explanation

  Only two of the projects can be selected because three would require more than $450,000 of capital. Project S can immediately be dismissed because it has a negative net present value (NPV). Using the NPV and the profitability index methods, the best investments appear to be 0 and P. The internal rate of return (IPP) method indicates that P is preferable to P. However, it assumes reinvestment of funds during Years 4 and 5 at the lRR (18.7%). Given that reinvestment will be at a rate of at most 12%, the IPP decision criterion appears to be unsound in this situation.

• Question 1043:

  Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Gleason has conducted a market study, at a cost of $26000, to determine which product will be more profitable. The results of the study follow.

  

  The costs associated with the two products have been estimated by Gleason's cost accounting department and are shown as follows:

  

  *Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed asset. According to Gleason's market study, the expected value of the sales volume of the breakfast rolls is

  A. 125,000 units.
  B. 260,000 units.
  C. 275,000 units.
  D. Some amount other than those given.
  B. 260,000 units.

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  Explanation

• Question 1044:

  When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project

  A. That generates cash flows for the longer period of time.
  B. Whose net after-tax flows equal the initial investment?
  C. That has the greater accounting rate of return.
  D. That has the greater profitability index.
  D. That has the greater profitability index.

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  Explanation

  The profitability (excess present value) index facilitates the comparison of investments that have different initial costs. The profitability index equals the present value of future net cash inflows divided by the initial cash investment. The investment with the greater profitability index will be the preferred investment. However, if investments are mutually exclusive, the net present value method may be the better way of ranking projects. The excess present value index indicates the best return per dollar invested but does not consider the alternative possibilities for unused funds. Thus, the smaller of the mutually exclusive projects may have the higher index, but the incremental investment in the larger project may make it the better choice. For example, an $8,000,000 project may be a better use of funds than a combination of a $6,000,000 project with a higher index and the best alternative use of the remaining $2,000,000.

• Question 1045:

  A working capital technique which delays the outflow of cash is

  A. Factoring.
  B. A draft.
  C. A lock-box system.
  D. Electronic funds transfer.
  B. A draft.

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  Explanation

  A draft is a three-part instrument in which one person (the drawer) orders a second person (the drawer) to pay money to a third person (the payee). A check is the most common form of draft. It is an instrument payable on demand in which the drawer is a bank. Consequently, a draft can be used to delay the outflow of cash. A draft can be dated on the due date of an invoice and will not be processed by the drawer until that date, thereby eliminating the necessity of writing a check earlier than the due date or using an EFT. Thus, the outflow is delayed until the check clears the drawer bank.

• Question 1046:

  Three of the basic measurements used by the theory of constraints (TOO) are

  A. Gross margin (or gross profit), return on assets, and total sales.
  B. Number of constraints (or subordinates), number of no constraints, and operating leverage.
  C. Throughput (or throughput contribution), inventory (or investments), and operational expense.
  D. Fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross profit).
  C. Throughput (or throughput contribution), inventory (or investments), and operational expense.

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  Explanation

  Theory of constraints (TOO) analysis describes three basic measurements: throughput contribution (sales -- direct materials), investments (raw materials; work-in-process; finished goods; RandD costs; and property, plant, and equipment), and operating costs (all costs except direct materials).

• Question 1047:

  In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?

  A. Labor.
  B. Overhead.
  C. Depreciation.
  D. Selling.
  C. Depreciation.

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  Explanation

  Most types of costs either are variable or contain some mix of fixed and variable components. For example, labor and materials are primarily variable. Their amounts fluctuate with the relevant cost drivers. Selling expenses and overhead costs can be either fixed or variable. Depreciation, however, is strictly a fixed cost when viewed in a decision analysis situation because it requires no cash outlay. Instead, the initial acquisition of the long-lived asset requires the cash outlay.

• Question 1048:

  The change in period-to-period operating income when using variable costing can be explained by the change in the

  A. Unit sales level multiplied by the unit sales price.
  B. Finished goods inventory level multiplied by the unit sales price.
  C. Unit sales level multiplied by a constant unit contribution margin.
  D. Finished goods inventory level multiplied by a constant unit contribution margin.
  C. Unit sales level multiplied by a constant unit contribution margin.

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  Explanation

  In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit--variable costs per unit) is constant. Unit sales times the UCM equals the total CM, and operating income (a pretax amount) equals the CM minus fixed costs of operations. If the UCM is constant and fixed costs are stable, the change in operating income will approximate the change in the CM (UCM x unit sales).

• Question 1049:

  A growing company is assessing current working capital requirements. An average of 58 days is required to convert raw materials into finished goods and to sell them. Then an average of 32 days is required to collect on receivables. If the average time the company takes to pay for its raw materials is 15 days after they are received, then the total cash conversion cycle for this company is

  A. 11 days.
  B. 41 days.
  C. 15 days.
  D. 90 days.
  C. 15 days.

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  Explanation

  The cash conversion cycle is the length of time between paying for purchases and receiving cash from the sale of finished goods. It equals the inventory conversion period, plus the receivables collection period, minus the payables deferral period, or75 days (58 days -`- 32 days -- 15 days).

• Question 1050:

  When demand uncertainty is low, firms tend to adopt a strategy of preemptive expansion. The conditions for successful preemption expansion include which of the following?

  A. The firm should avoid market signals that alert competitors to the firm's plans.
  B. The expansion should be small relative to the market to minimize risk.
  C. Economies of scale should be large relative to demand.
  D. The business should be strategically vital to competitors.
  C. Economies of scale should be large relative to demand.

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  Explanation

  Economies of scale should be large in relation to demand, orthe learning-curve effect should give an initial large investor a permanent cost advantage. For example, the preemptive firm may be able to secure too much of the market to allow a subsequent firm to invest at the efficient scale. That is, the residual demand available to be met by the later firm is less than the efficient scales of production. The later firm therefore must choose between intense competition at the efficient scale or a cist disadvantage.